Cost 2_updated20130310

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Transcript of Cost 2_updated20130310

South Korea Haengbok BancorpA small nationwide Korean BankCustomers: SMEs with some international operations Haengbok Bancorp Opened the first foreign branch in New York New York External EnvironmentThreat: Fierce competition for US-based Korean customers

Opportunities: Many businesses were having difficulty raising capital as a result of financial crisisNew York is the largest US money center, relatively high concentration of Korean-owned and oriented businesses The USA Cons:Time-consuming: may take a long time to approveProblem of independence: 2 most experienced account managers are in the committeeLittle involvement for branch account managers: Headquarter may not understand the US market and make wrong judgment credited with the interest earned on the loans initiatedcharged for the expenses incurred(E.g. cost of funding the loans)Accounting Measure Result Control 10% Cash Bonus based on the profit of mini profit center Cash bonus will distribute shortly after year end No punishment if loss incurred Personnel Control - Job assignment Regular review by management, national bank examiners and external auditors Assigned by geographic locationsAssign two account managers to develop opportunities with prospective clients in industry that they had prior experiences Personnel Control - Recruitment process Culture Control Result-oriented cultureSenior manager(Jae): Did not care how they identified and cultivated their clients as long as they eventually ‘booked good deals’ People control Suggestion on Control System Action control Suggestion on Control System Result control Suggestion on Control System Culture control Suggestion on Control System Description of the client and its business, the proposed use of the loan funds, the proposed loan terms, and an analysis of the loan’s risk. Risk was addressed in many ways, but market prospects and the client’s financial statements were always considered.Behavioral constraints: restrict account manager’s loan application processPrevention nature Action Control Result Control Personnel Control and Culture Control Review loan application by Branch Credit Committee according to guildlines and checklists, to ensure adequate material information is collected and analyzed in a proper manner

Establish a mechanism for re-assessment of rejected loan application

Effective Communication: For >$5m loan, Meetings are held with the presense of all responsible parties: Corporate Credit Committee, Branch Credit Committee and the Accounting Manager Solution Reduced morale: effort is not proportionate with the resultavoid making >5m loan application: avoid headquarter involvement. Easy approvalCircumvention of $5m control Effects on Accountant Managers’ Behaviors and Performace Branch Credit Committee:Granting approval of loan based on trust of Accounting Manager's judgementNo further review on applicationFailed to discover the omission of material informationLose the function of check and balance Rejected Loan Application – Problem The Corporate Credit Committee heard allegations that FETC might be involved in transfer pricing disputes with tax authorities

The Committee believed there was high possibility of failure of meeting its cash flow obligation

>$5m loan needs to be approved by Corporate Credit Committee in Seoul, South Korea

Jae answered all enquires from the Corporate Credit Committee Objectives:

Fulfill the goal to be an international bankAllow the bank to provide better support to its Korean partners and generate additional business from primarily US-based-Korean –owned businessesTo be better informed about worldwide banking trends Mr. KimSenior ManagerExperienced account manager in Seoul Establishment of loan application package Pros: Reduce credit risk: Ensure enough assessment of loan applicants have been doneEfficient way of coordination: Facilitates process of approval Help accumulate knowledge of US-based-Korean customers Cons:Not specific enough. Manager may use favourable analysis to get approval Procedures for approval of loan application <1 million, approved by Mr. Kim>1 million, approved by branch credit committee>5 million, approved by headquarter’s credit committeePreaction review: scrutiny of proposalsPrevention nature Pros:Double Approval to reduce loan risksAccumulate information on worldwide banking trends ProsProvide more incentives to account managersHelp achieving the branch’s objective – to grow rapidlyDevelop the full potential of each account managers Management Philosophy Management Philosophy Management Philosophy Result-orientedRemuneration directly links to profit generatedThe instructions made – Kim only cares about the result Rejected Loan Application – Problem What type(s) of philiposophy do you think this company is parcticing? Q & A Q & A If you were Jae,1. how will you think?2. what will you do if the same thing happens again? Q & A Which type of job allocation method do you think this company should use? Mini profit center Pros: Encourage entrepreneurshipFreedomComprehensive – Incorporate different aspects of performancePrecise and Understandable Cons: Conflict of interest - Expenses incurred directly affect the bonus of account managers- Conflicts between interest of company and interest of inidividual mini profit-center Cash Bonus Pros:Motivation - Incentive to boost revenue and reduce costCost effective Bonus system: precise ; objective ; understandable ; controllable Cons:Encourage manipulation (shift profit to next year)Encourage risk-takingNo / Low retentionCash flow problem due to distribution of cash bonus Regular Review Pros:Identify potential problems (E.g. declining business conditions, violations of covenant, and missed payments) Pros:Concentrate on specific locationMake use of their prior experiences to develop specific industries Cons:Conflict - Responsibilities may be overlapped with those assigned by geographical location Recuit by himself Hire experienced managers with track records of success Pros:High efficiency in recruitment processManagers are experienced in US banking industryDifferent people bring new ideas Cons:Cannot cooperate together due to various operating styleInadequate consideration before hiring Cons:Not specificNot understandable (Meaning of “good deal” ?) Pros:Flexibility A. Centralization B. Decentralization C. Result-oriented D. Culture-oriented DecentralizationOnly a few and not well-defined action controlAlmost no supervision on how the work is doneEach account manager work independently like a small and separate business. ConsEncourage the account managers to take riskNo communication between Kim and the account managersNo retentionPay cash bonus Conflict between personal interest and company’s interest A. By industrial segmentation B. By geographical segmentation Recruitment procedure: Set up human resources department for recruitmentEstablish a comprehensive recruitment procedureConsider other factors in evaluating the suitability of candidates Job allocationAllocate work by industry instead of geographical location Loan applicationEstablish a standard loan application packageInstruction on the composition of risk analysis and required supporting documents Loan approval Change the composition of the credit committeeTo enhance segregation of dutiesRemove the two senior account managers and introduce one independent senior staff Remuneration package

Basic salary: raise to the level of industry average Maintain the competitiveness Bonus: change 10% stock optionVesting period improves the retention rate of account managersInduce account managers to consider long term profitability and hence avoid risk taking behavior for short term profit No loss penaltyNo bonus is already a penaltyExternal environment affects return Goal setting

Set up a five-year goal for the whole branchi.e. Attain overall certain market share in merchant bank sector Enhance sense of belongings Set up short term goal for each account manageri.e. Attain certain market share in the industry that they are responsible forServe as the lower cap for getting bonusProvide motivation to work harder